Financial Life Lessons in Planning for and Paying for College
April is Financial Literacy Month, and planning for college costs might be a great way to teach your children more financial life skills.
Whether you start college planning in their early years or even if you’ve waited until their high school years, tackling the massive expense of paying for college will entail valuable lessons in budgeting, saving, spending and much more.
This kind of planning can provide your student with the financial knowledge that can set them up for a life of success.
What is Financial Literacy?
“Financial literacy” can sound like a complex or technical idea, but generally, it’s about having the knowledge and skills to effectively handle your finances – to make money, to use money in support of life goals and to avoid running out of money or losing it all.
Fortunately, there are now national standards for personal financial education that focus on six key financial topics: earning, spending, saving, investing, managing credit, and managing risk – with the ultimate goal of providing comprehensive financial education to help students become smart consumers.
Financial literacy doesn’t guarantee wealth; even the best prepared can have a streak of bad luck or make a mistake. But not knowing the basics of how to handle money is a sure way to add lots of financial friction to life and also lead to a life with fewer options and opportunities. And, personal money management skills, or lack thereof, has a broader societal impact too. Current estimates suggest that financial illiteracy costs an average American over $1,000 per year, with a collective toll on the country that totals well into the billions of dollars.
How Can College Funding Planning Teach Financial Literacy?
Planning for college, saving for college, and managing financial aid (including student loans) are three key topics that relate well to financial literacy. Here’s how:
Planning for College Expenses
There are several factors that can affect your college costs, but thoughtful planning is the starting point to make college more affordable. And, the basic planning skills for how to pay for college are similar to how you plan for other consumer purchases. This makes it the perfect way to emphasize key points related to spending and managing risk.
Like other big purchases, your college purchase should include researching your options, defining your budget and assessing the risk and rewards of potential choices. For example, learning more about how college pricing works today; most families do not pay the published price for a school, and within each institution there is great variability in cost from one family to another. And, keeping up with all of the weird acronyms (FAFSA, EFC, FSEOG), impenetrable financial aid letters, and tax strategies are the kind of research it takes to help turn college from impossibly expensive to a reasonable financial challenge.
On the spending side, you’ll want to consider defining your college budget – how much in savings and cash flow will be available to pay for college? Without that information, you could end-up spending beyond your means and taking on too much debt.
Additionally, weighing the risks and rewards of different choices can highlight potential savings or trade-offs. For example, considering a less expensive school versus a more expensive school that is also more generous with student aid; living at home versus living on campus, etc. There are definitely valuable financial lessons to learn here. In short, planning for how to pay for college is a great way to learn how to plan to pay for things period.
Saving for College
Waiting until tuition bills come due to figure out how to pay for college is a recipe for long term financial pain – most likely because you’ll end up taking on crippling debt – both parents and students. Saving for college is one way to avoid burdensome amounts of college debt.
Effective saving requires practical knowledge like budgeting. Even more, it takes discipline and the self-control to make decisions now, that in the long run, will be kinder to a future version of yourself. This gets easier the more you practice it.
However, not all ways of saving are the same. For example, what do you do with your savings? Burying it in your backyard and digging it up when you need it is one way to hang on to your money, but it’s a lot less effective than say, utilizing a high yield savings account or buying an education savings bond.
Even more effective though is investing in a 529 plan. A 529 College Savings Plan can provide significant tax benefits and, over time, investment growth for your account. A 529 Prepaid Tuition Plan allows you to lock in the price of tuition now at some colleges and universities. Maximizing your 529 is an excellent way to make the most of the money you’re saving for college.
To put it differently: how you save is as important as how much you save. That makes paying for college a chance to introduce your student to the basic ideas behind investing, just as much as saving or budgeting.
Managing Financial Aid
Some people think of financial aid as being for students with obvious financial need or special talents. It might seem that while most people pay the advertised price of a school, a few with perfect SATs or who come from backgrounds of extreme hardship will pay a lot less. Nothing could be further from the truth.
These days, most students at private schools and more than half at public schools receive financial aid. One reason for this is that schools provide financial aid to attract and retain students, which helps schools to fill their classes and meet their enrollment goals. Importantly, a lot of this is gift aid in the form of grants and scholarships that don’t need to be paid back. Merit aid is not just for “straight A” students and can be awarded for various student talents and achievements. The real point is that learning how financial aid works can make a universe of difference in paying for school.
Of course, many students still end up taking out loans, which means dealing with credit.
Credit is about borrowing money to acquire goods and services and then repaying the money. American society is heavily credit-dependent, and it’s almost guaranteed that at some point your child will be taking out loans for their car, house, business, or any number of other expenses.
So, learning how to handle credit to pay for college can get kids ready to manage credit in general. Part of this knowledge means knowing to avoid it whenever possible; debt is expensive, can take years to repay and interferes with other life pursuits. Beyond that, being able to think critically about the credit landscape can go a long way. As an example, there’s a big difference in what you can expect from taking out private versus federal student loans. Interest rates, payment terms, and repayment plans are generally much more favorable with federal loans, and reducing your reliance on loans altogether while also prioritizing federal loans can save thousands of dollars on college expenses.
Credit is going to be a part of your child’s life. The sooner you can help your child to understand how to use credit to their advantage, the easier their life will be.
Paying for college is the ideal opportunity to equip your children with the knowledge necessary for greater financial success. More specifically, discussing how to plan, save, and manage financial aid for college is the perfect way to get them up to speed on the basics of financial literacy and long-term financial wellness.
Looking for more ways to get involved? The federal government has some great resources if you want more on financing college. For more about Financial Literacy Month, EVERFI has a calendar of useful events (the third week is focused on paying for college). Finally, FamZoo offers educational tools as well as a family prepaid bank card and app to provide kids with hands-on money management experience.
And if you need more help with your college planning, consider working with us at College Money Smart. We specialize in coming up with an effective and personalized plan to save you money and time.
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